Hong Kong, October 09, 2020 -- Moody's Investors Service has downgraded Weibo Corporation's issuer
and senior unsecured ratings to Baa2 from Baa1.
At the same time, Moody's has revised the outlook on the ratings
to negative from stable.
On 28 September, Sina Corporation announced in its SEC filings that
it has entered into definitive agreement to be privatized by New Wave
Holdings Limited, a company controlled by its chairman and CEO Mr.
Charles Chao. The transaction, which values Sina at $2.59
billion, will be majority funded by debt.
The transaction requires approval from two-thirds of the company's
shareholders. On September 29, Sina also announced that it
had already secured 61% of shareholder votes, indicating
a reasonably high likelihood that the transaction will be completed in
1Q2021.
"The downgrade reflects the more aggressive financial policy at Weibo's
controlling shareholder and parent, Sina, as demonstrated
by Sina's proposed debt-funded privatization,"
says Lina Choi, a Moody's Senior Vice President.
There are close linkages between Sina and Weibo, with Weibo accounting
for the majority of its parent's assets and earnings. The
substantial use of debt deviates from Moody's expectation of prudent
financial management, and could impact corporate governance at both
Sina and Weibo.
"The negative outlook reflects the potential further drag on Weibo from
Sina's weakened credit profile if the transaction is completed,
considering the parent's elevated leverage, reduced transparency,
and uncertainty around its ability to deleverage in the next two years,"
adds Choi.
RATINGS RATIONALE
Weibo Baa2 issuer rating reflects the company's strong market position
as a leading online social media platform in China (A1 stable) and its
ability to attract content providers, users and advertisers.
These factors allow the company to capture an increasing share of the
online advertising market.
Weibo's financial profile is solid, featuring a $635
million net cash position as of 30 June 2020.
The rating also considers Weibo's strategic cooperation with Alibaba
Group Holding Limited (Alibaba, A1 stable), which has helped
boost revenue and cash flow, and the company's strong financial
profile with an above-industry-average profit margin and
steadily growing free cash flow.
Weibo's rating is constrained by China's competitive online advertising
market, rising acquisition risks related to the company's efforts
to gradually broaden its business scope, and regulatory risks.
Moody's has considered risks from the high concentration of ownership
and voting right on Weibo's majority shareholder, Sina,
which holds a 44.9% stake and 71% of voting rights.
Today's action accentuates such risks.
Sina and its controlling shareholder's planned substantial use of
debt to fund the privatization demonstrates a more aggressive financial
policy than our expectation.
The privatization, if completed, will increase Sina's
leverage while reducing transparency, and could signal a more aggressive
financial policy going forward. This is because Sina will cease
to be a publicly listed company and will no longer be obligated to disclose
financial data regularly.
This will also lead to a divergence in the credit quality of Sina and
Weibo, with the potential for the weaker parent's financial
to act as a drag on Weibo's credit metrics. This risk is
reflected in the negative outlook.
Weibo is Sina's primary source of cash flow. In 2019,
Weibo accounted for 82% of Sina's consolidated revenue,
86% of its reported gross profit, 82% of total debt,
and 74% of total cash.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could change the ratings outlook back to stable if (1) the privatization
does not proceed as planned; (2) Weibo's cash flow and cash
holdings are sufficiently ring-fenced from servicing and repaying
Sina's privatization debt; (3) Sina and New Wave take proactive
steps to deleverage following the privatization; or (4) Weibo continues
to achieve its growth targets while maintaining a strong financial profile,
overcoming the execution risks associated with its business growth and
intense competition.
Moody's could downgrade the rating if Weibo (1) supports Sina's
liquidity, capital spending and investments, including through
intercompany loans or upstreamed dividend payments; (2) fails to
fend off competition while its social advertising business is substantially
disrupted, weakening its revenue growth and cash flow generation
for a prolonged period; (3) deviates from its prudent financial policy
and grows its user base, business scope or content library at the
expense of its currently strong financial profile; or (4) engages
in aggressive acquisitions that strain its balance-sheet liquidity
or weaken its overall risk profile.
Specifically, the issuer rating could be downgraded if debt/EBITDA
fails to trend toward 3.0x, retained cash flow/debt declines
on a sustained basis, or the company has a sustained and enlarging
net debt position.
Adverse developments in China's regulatory regime that affect Weibo's
operations or business model would also pressure the rating.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Weibo Corporation is one of the largest online social media platforms
in China. The company provides services through its website "Weibo.com"
and through apps, allowing users to create and share content through
text, pictures and videos, and engage in social interaction.
Weibo was founded by Sina Corp., its parent, in 2009.
The company listed on NASDAQ in April 2014.
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Lina Choi
Senior Vice President
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
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Hong Kong
China (Hong Kong S.A.R.)
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Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
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Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
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